Monday, April 27, 2009

GDP (Q1): contracting less sharply due to net exports and private consumption

FOMC: emphasis on ongoing need for credit easing measures

PCE core deflator (Mar): annual rate remaining unchanged

ISM manufacturing index (Apr): contracting more slowly again

At 26.0, the Conference Board's consumer confidence stabilised at a level close to its record low in March. Expectations improved slightly, whereas the current assessment declined further due to the rapidly rising level of unemployment. However, despite the unfavourable labour market situation, we forecast that consumer confidence will have risen to about 33.0 in April, because the University of Michigan's (UMI) preliminary April consumer sentiment rose by about 5 points. As the graph shows, the Conference Board's consumer confidence index, which is more volatile, is currently much lower than the UMI indicator. We expect the final April UMI consumer sentiment to have remained more or less unchanged, despite the fact that the latest weekly ABC consumer comfort poll has risen by 4 points to -47.

The advance GDP figures for Q1 are likely to show another sharp annualised decline of about -4.0% qoq. However, the rate will be much less negative than in Q4: private consumption, which had fallen by 4.3% in the last three months of 2008, could have remained stable or even risen slightly. And as the real trade deficit narrowed significantly in February, net exports will have contributed positively to growth, by about one percentage point. However, the depletion of inventories will probably have cancelled that out. Investment, particularly in residential and commercial construction, deteriorated substantially, and total investment could have contributed -5 percentage points to growth. But government spending could have increased markedly, particularly due to defense outlays.

The PCE core deflator was only 0.9% in Q4, but could have risen to an annualised 1.6% qoq in the 1st quarter, still well within the Fed's comfort zone of 1-2%.

The FOMC will maintain the target range for the federal funds rate at 0 to ¼ percent, and indicate that it is likely to remain at this level for an extended period. Furthermore, the committee will emphasise again that the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. This time, the assessment of economic prospects could be somewhat brighter, in line with the Beige Book's notion that the pace of decline has slowed. But the Beige Book also reported that there was further downward pressure on prices due to economic slack, and thus the committee could again see some risk of inflation persisting for a time below rates that best foster economic growth and price stability in the longer term. This would emphasise the ongoing need for credit easing measures, and the Fed's balance sheet volume, currently at $2.24bn, is likely to rise to above $3bn this year.

Personal income could have decreased again by 0.2% mom in March, as aggregate working hours fell sharply and average hourly earnings rose by a mere 0.2% mom. Given that retail sales declined by 1.1% mom and gasoline prices were lower, we expect nominal personal spending to have dropped by 0.5% mom. Real personal spending might not have gone down as much.

Just like core CPI, the core PCE deflator could have risen by around 0.2% mom in February, leaving the annual rate unchanged at 1.8%. However, the FOMC expects it to approach 1% in the coming months, and to remain at the lower end of its comfort zone in 2010 and 2011.

The employment cost index (ECI) went up by a mere 0.5% qoq in Q4, illustrating that the unfavourable labour market situation has slowed the updrift in wages noticeably. We expect the ECI to have increased by 0.5% qoq again in Q1, lowering the annual growth rate of employment costs further from 2.6% to 2.5%.

As expected, initial jobless claims went up again to 640k in the week ending 18 April. We predict that jobless claims will have continued rising to about 650k in the week ending 25 April, slightly higher than the last 4-week moving average.

Since January, the ISM manufacturing index has improved for three consecutive months, albeit remaining well within the contraction zone. Given that the Philadelphia Fed index and the New York Empire manufacturing index in particular have both risen to much less negative levels, we forecast that the ISM manufacturing index will have increased again to 38.0 in April - still far below the expansion threshold of 50. The Chicago PMI, which had fallen to a long-time low of 31.4 in March, could have recovered noticeably to about 36.0 in April.

Factory orders went up by 1.8% mom in February, mainly due to a rebound in defense orders. But this increase might be revised downward by about 0.5 percentage points, due to the fact that February durable goods orders only rose by 2.1% instead of 3.5%. We already know that durable goods orders fell by 0.8% mom in March. As the ISM new orders component recovered by 8 points to 41.2, we expect non-durable goods orders to have fallen at a slower pace than before. Thus in March, total factory orders could have declined by 0.8% mom too.

Between August 2007 and February 2009, domestic vehicle sales virtually halved from their peak of 12.7m annualised to a mere 6.4m. After rebounding to 7.1m in March, they are expected to have stabilised around this still very low level in April.

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